New Delhi: Price of natural gas, used for generating power, making fertilizer and supplying compressed natural gas (CNG), was on Friday cut by 18% to $2.5 per million British thermal unit, fourth reduction in 18 months. Rate of natural gas produced from existing fields of state-owned Oil and Natural Gas Corp. Ltd (ONGC) and Reliance Industries Ltd has been cut to $2.5 per mmBtu for a 6-month period from 1 October, from $3.06 per mmBtu currently.

As per the new gas pricing formula approved by the National Democratic Alliance (NDA) government in October 2014, gas prices are to be revised every six months and the next change is due on 1 April. The reduction in natural gas prices would mean lower raw material cost for CNG and natural gas piped to households (PNG) and would translate into reduction in retail prices.

It would also mean lower feedstock cost for power generation and manufacturing of fertilizers. Rates were last cut by 20% to $3.06 from 1 April. The price of gas between 1 October 2015 and 31 March 2016 was $3.81 per mmBtu and $4.66 in prior six month period.

“The price of domestic natural gas for the period 1 October 2016 to 31 March 2017 is $2.50 per mmBtu on Gross Calorific Value (GCV) basis,” said a notification issued by the oil ministry’s petroleum planning & analysis cell. The reduction will hit producers like state-owned ONGC as well as central government whose earnings from royalty and income tax will dip by about Rs800 crore during the remainder of the fiscal, according to industry estimates.

Every dollar dip in gas price results in Rs4,000 crore hit in revenue of ONGC on an annual basis. The current price reduction would hit its revenue by about Rs1,000 crore. The government also announced a sharp reduction in cap price based on alternate fuels for undeveloped gas finds in difficult areas like deep sea, which are unviable to develop as per the existing pricing formula.

The cap for 1 October 2016 to 31 March 2017 will be $5.3 per mmBtu, down from $6.61 in April 1 to September 30 period, PPAC notification said.

ONGC is the country’s biggest gas producer, accounting for some 60% of the 90 million standard cubic meters per day current output. All of its gas as well as that of Oil India Ltd and private sector RIL’s KG-D6 block are sold at the formula approved in October 2014. This formula, however, does not cover gas from fields like Panna/Mukta and Tapti in western offshore and Ravva in Bay of Bengal.

The price cut should result in a reduction of Rs0.5 to Rs1.5 per standard cubic meter in price of PNG for domestic customers and Rs0.8-1.5 per kg cut in CNG prices. Retailers like Indraprastha Gas Ltd (IGL) in Delhi are likely to announce a revision in rate on Saturday.

The government had in October 2014 announced a new pricing formula that calculated local rates by using prevailing price in gas surplus nations like the US, Russia and Canada. While the cut will impact the revenue of producers, it will bring gains for users in the power and fertiliser sector in the form of lower feedstock cost.

As per the mechanism approved in October, 2014, the price of domestically produced natural gas is to be revised every six months using weighted average or rates prevalent in gas- surplus economies of US/Mexico, Canada and Russia.

Indian gas prices are calculated by taking weighted average price at Henry Hub of the US, National Balancing Point of the UK, rates in Alberta (Canada) and Russia with a lag of one quarter. So, the rates for 1 October 2016 to 31 March 2017 period were based on average price at the international hubs during 1 July 2015 to 30 June 2016.